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Energy regulator's tampering with fuel pricing formula raises eye brows

By Macharia Kamau | June 1st 2021

Fuel pumps at a petrol station in Nairobi February 18, 2021.[Elvis Ogina,Standard]

Petroleum and energy authorities have in the recent past failed to stick to their rules when determining local pump prices - rekindling questions as to whether the formula has been abandoned.

For two months in a row, the Energy and Petroleum Regulatory Authority (Epra) has tinkered with the formula, denying oil marketing companies’ margins but instead get compensation from the government - a process whose legality is in question.

The regulator first cut the oil marketers’ margin in the April-May pricing cycle in what was termed a pump price stabilisation mechanism, which saved consumers from price hikes.

In the May-June cycle, Epra restored the margins for super petrol even as the oil marketers still take a cut on diesel and kerosene. In the prices announced mid-May, the energy regulator restored the margin for super petrol to Sh12.39 per litre, from Sh8 a month before.

The oil marketers will however earn Sh11.72 per litre of diesel and Sh8.93 per litre kerosene, which is lower than the Sh12.36 margin per litre of diesel and kerosene that the pricing capping formula gives. This is the margin that they had been making before the price stabilisation move in April.

Epra has however declined to respond on the issues raised on its fuel pricing - including why it failed to fully restore oil marketers’ margins for diesel and kerosene.

It also remained mum on how the oil firms will be compensated for the lost margins for the two products since April. It could however entail a similar agreement as was the case over the April-May pricing cycle, whereby the oil marketers were compensated for lost margins by the National Treasury for foregoing some Sh1.3 billion in margins during the month.

In addition to querying the implementation of the price capping formula over the last two months, Consumers Federation of Kenya (Cofek) Secretary-General Stephen Muturo also noted that the computation of pump prices has also been lacking in transparency

“Over the last two months, it appears that regulator has abdicated its role to the Ministry of Petroleum, which should be playing the role of a policymaker… it appears like someone is taking advantage of the transition process at Epra,” he said. “There is nowhere in the formula that allows for what Epra has been doing and in the end, it is the consumer who will suffer when they recover the margins that have been discounted. The regulator has in numerous instances in the past confirmed why the formula is anti-consumer.”

“We have been struggling to understand what has guided what the Ministry and Epra have done because there are no regulations to govern fuel stabilisation… the likelihood that compensation to oil marketing companies (OMCs) has been exaggerated or used to exploit the troubled Petroleum Development Levy Fund whose collections are well beyond Sh20 billion (since July 2020 to date) remains a mystery to the public.”

He said while Epra breaks down how it arrives at fuel prices when announcing new prices every month, there are more factors it does not report publicly, which has made the price determination lack transparency.

The chairman of Kenya Independent Petroleum Dealers Association (Kipeda) Joseph Karanja last week told the Financial Standard that it has become difficult to tell which aspects of the pricing formula are regulated.

Among the areas of concern for Mr Karanja, and other independent oil marketers who have to rely on large companies for their supplies is that Epra has not been publishing the maximum wholesale prices. This has meant the oil majors can sell their stock to independent players at much higher prices, at times resulting in the smaller players making little or nothing when reselling. “Many of the major oil companies have increased wholesale prices,” he said.

Controlled environment

“It has been bad business…. it is no longer about market forces or even the controlled environment that is supposed to be in place with the pricing regulations,” Karanja noted

He noted that when Epra published fuel prices in the April-May pricing cycle without putting caps on wholesale prices, the wholesale price for a litre of super petrol shot up from Sh113 to Sh117.

“When the cap on wholesale prices was removed, everybody adjusted their prices upwards. The multinationals’ margins are guaranteed… while dealers like ourselves have been squeezed… we are feeling exposed because the wholesale price has been adjusted up and we cannot increase our prices because there are caps on the retail price,” he said. Another lobby, the Kenya Civil Society Platform on Oil and Gas (KCSPOG) noted that the formula had failed to protect consumers but assured government and oil companies’ revenues and their predictability.

“The pricing formula in its current format has been able to maintain an almost predictable stream of revenue for government and oil marketing companies but has not done well in protecting consumer,” said Charles Wanguhu, Coordinator, KCSPOG.

He said the proposed regulations on fuel pricing, which are expected to replace the current 2010 rules that are currently in use, also fail to capture consumer concerns. Among these are having a fuel stabilisation with legal backing. When the Ministry increased the Petroleum Development Levy last year, it noted that the funds would be used to stabilise local pump prices and cushion consumers from sudden shocks.

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